CANADA — Today’s rate hike was widely expected following some positive data points and louder-than-usual hints from the Bank of Canada.
The bigger question was how the bank’s tone might change in the face of new tariffs and growing trade uncertainty, reported Josh Nye, senior economist for the Economics Department of RBC Financial Group.
He adds, “Those developments were taken in stride—the bank didn’t waffle on their bias to raise rates gradually and as in May they refrained from using the word ‘cautious.’ They did mark down their growth forecasts somewhat more, with tariffs and trade uncertainty now expected to lower Canadian GDP by 2/3 of a percent by the end of 2020 (the impact was expected to be a bit less than 1/2 ppt in April’s MPR).”
However, Nye noted that the economy is still expected to grow at a 2 percent pace over the next few years, slightly ahead of its potential rate.
“Even with trade issues weighing on business investment and exports, those sectors are expected to make decent contributions to growth this year and next. That will be an important factor offsetting the impact of higher rates and tighter mortgage regulation on consumers and housing,” he said. “All told, with the economy operating close to full capacity and growth expected to remain above potential, further removal of accommodation was needed to keep inflation in check.”
Nye stated that the relatively positive tone and unchanged tightening bias should reinforce market expectations that today’s rate hike won’t be the last this year. The trade backdrop will of course remain key to the rates outlook, and the recent direction of global rhetoric suggests the BoC’s assumed impact of tariffs and trade uncertainty will remain fluid. But their forecast for slightly-above-potential growth perhaps gives them a bit of leeway on that front. 4
He added that Governor Poloz was keen to point out the monetary policy implications of trade actions aren’t necessarily clear cut. Said Nye, “Overall we remain comfortable with our call for official rates to rise another 25 basis points in the fourth quarter, with two further hikes expected in the first half of 2019.”
SOURCE: Economics Department of RBC Financial Group press release